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An Overview of the TVR Phase-Out Issue Thus Far

By Jason Economou, RAM Government Affairs Director

January 13, 2022

There are roughly 7,302 condominium units located throughout the Apartment zoning districts that have a vested right to conduct transient vacation rentals (TVRs). This vested right is based primarily on the fact that these buildings were lawfully permitted to conduct that use historically, and many were built and designed for that purpose. The defense of this vested property right has been a major advocacy issue for RAM for decades. I will not take the time to go through the full history of the issue in this document, but if you are curious I encourage you to review previous analysis provided to RAM members from my predecessor, Dave DeLeon, as well as from myself. Though RAM was successful in having this right codified in the Maui County Code, where it remains today, there have been numerous attempts to strip the subject condominium units of their ability to conduct TVR use since then.

The most recent threat to this vested property right arose as part of the Maui County Council’s August 24th, 2021 agenda as County Communication 21-422. CC 21-422 included draft legislation from Councilmember Tamara Paltin’s office that would effectively phase out transient accommodations in the apartment zoning districts as they were sold. Specifically, it would make it so the ability to conduct TVR use in the subject properties is lost once a property is sold or transferred after December 31, 2021 (this date was clearly an aspirational placeholder). Therefore, current property owners would maintain the right to conduct TVRs in their units for however long they own the property, but they would not be able to confer that right to future owners if the sale or transfer occurred after December 31, 2021. CC 21-422, and the proposed legislation attached thereto, was referred to Councilmember Paltin’s  Planning and Sustainable Land Use Committee.

After CC 21-422’s referral to the committee, RAM and our colleagues got busy on research and messaging in opposition to this proposal. Within days, we identified several issues with Councilmember Paltin’s TVR phase-out proposal (hereinafter, the “Paltin proposal”), and we circulated our concerns publicly. Our arguments against the Paltin proposal were as follows:

1. This Bill Would Defund Affordable Housing for Maui County:

  • Maui County's recent Comprehensive Affordable Housing Plan, calls for the County to "increase funding into the Affordable Housing Fund to $58 million annually."
  • This increased contribution to the Affordable Housing Fund will be used to effectuate necessary infrastructure updates and to allow the County to play a meaningful role in the development of truly affordable housing.
  • If this legislation is passed, we estimate thatthe County stands to lose as much as $74 million in property tax revenue annually (which is roughly 8.77% of the total operating budget!).
  • This loss in revenue would make it difficult for the County to maintain the services it currently provides, and it would make it impossible to increase funding to the Affordable Housing Fund.
  • Without the revenue, there is no investment in Affordable Housing, and there will be property tax increases for everyone else.

2. This Bill Will Harm the County, the State, and Many Others:

  • The STR property tax class in Maui County is expected to produce $137,908,224 in property tax revenue for the County in FY 2022 (more than 5 times as much as the Hotel class or the Owner-Occupied class).
  • With there being roughly 13,466 properties in the STR class overall, the average amount of tax paid by each property is $10,241 per property.
  • This legislation is designed to remove just over 7,300 properties from the STR property tax class, which equates to roughly $74 million in lost revenue! That is equal to 8.77% of Maui County's operating budget for this year.
  • The only way to make up for this huge loss in revenue is to increase property taxes for everyone else..
  • This bill will also remove 7,000+ units from paying TAT, which we estimate to be a loss of roughly $69 Million in TAT revenue for the State of Hawaii. Now that the County will also be charging a 3% surcharge, it will result in direct loss of revenue for the County as well
  • Conveyance Tax losses could be substantial, but are difficult to estimate at this time. These 7,000 properties currently equate to billions of dollars worth of real estate, but some estimate that they could lose as much as half their value the moment this legislation is passed. That will be devastating for conveyance tax revenue, and devastating to individuals who own these properties. There is the distinct possibility that this legislation could also cause a bit of a financial crisis, since many current owners will suddenly own more on their mortgages than the units are worth. That is essentially what happened on a national level in 2008, and we all remember how bad that was.

3. This Bill is Yet Another Gift to the Hotel Industry!:

  • During the pandemic, the Hotel properties were the only properties that were assessed at a lower value due to lost revenue, and they were openly given priority in reopening when restrictions started loosening.
  • Now, through this bill, the County is eliminating the only real source of competition on the island that the hotels have.
  • These impacted properties are not "illegal short term rentals." They are mostly professionally managed units in buildings that have historically been used for the purpose of transient accommodations. The main difference between these units and the hotels is that they are usually family owned, as opposed to the hotels that are owned by multinational corporations.
  • The only group that will benefit from this bill is the hotel industry, as the reduction in revenue this bill will cause will be devastating for everyone else in the County.
  • It will be most devastating to anyone that hoped the Affordable Housing Plan would actually produce affordable housing.

4. The Impacted Properties are Not Suitable for Our Residents:

  • The proposed legislation aims to "create long-term affordable housing opportunities for residents," but the reality is that these properties are not suitable for that.
  • Parking is generally 1-2 spaces per unity, and the spaces are primarily for compact vehicles.
  • Units were designed as transient accommodations to begin with, and have minimal storage for families or long term occupancy.
  • Units are all 30+ years old, and have high maintenance fees and high special assessments to cope with aging infrastructure. Some recent special assessments have been as high as $100,000 per unit.
  • Impacted properties are primarily located in the sea level rise exposure area, and will face financial and practical challenges with climate adaptation. Turning these into "affordable housing opportunities" will almost certainly ensure deferment of critical infrastructure updates for many of these properties, and an increased risk of catastrophic circumstances (like the Miami Condo Collapse).
  • The counties are granted zoning authority by the State of Hawaii through HRS § 46-4, which does allow “for the amortization or phasing out of nonconforming uses or signs over a reasonable period of time in commercial, industrial, resort, and apartment zoned areas only.”
  • However, TVR use is explicitly permitted pursuant to the Maui County Code, and has been conducted in the Apartment Zoning Districts for a very long time by many properties. This is hardly a “nonconforming” use. Therefore, it is unlawful to abruptly eliminate the use in this manner.
  • These properties clearly have a vested property right to conduct transient rentals, and the proposed legislation will result in a lot of litigation against the county.  Some might argue this legislation is a government taking or violation of due process, and there will likely be claims for zoning estoppel, and it will ultimately cost the County (i.e. tax payers) a lot of money to sort out.

As we waited for the Paltin proposal to get scheduled in the Planning and Sustainable Land Use Committee, we also learned that Council Vice-Chair Keani Rawlins-Fernandez had been working on a TVR phase-out proposal. The Rawlins-Fernandez proposal also asserts that its purpose is “to create long-term housing opportunities for residents by phasing out Transient Vacation Rentals in the Apartment Districts,” but it goes about it in a different way. Rather than phasing out TVR use in all of the subject properties, it would allow TVR use to continue for those properties that are located within the sea level rise exposure area, but it would eliminate the use for all subject properties outside of that area in January 2023. Therefore, it would impact the property rights of roughly 3,624 of the subject units, approximately 3,000 of which are currently paying the STR tax rate.

The TVR phase-out issue was agendized by the Planning and Sustainable Land Use (PSLU) Committee for the first time on November 3, 2021. The intent of the November 3rd meeting was to determine what, if any, legislative proposal the committee would send to the three Planning Commissions for review. In the lead-up to that meeting, RAM and the MVRA raised a large number of concerns and arguments against the legislation, and we each initiated Calls for Action among our members. This resulted in over 500 emails opposing the proposal being sent to each member of the County Council, as well as hundreds of people providing testimony on the Maui County’s eComment forum for  PSLU-34.

At the outset of the November 3rd meeting, it became clear that Councilmember Paltin was distancing herself from the argument that her proposal would create long-term affordable housing opportunities for residents, and appeared to pivot toward the argument that a TVR phase-out was necessary to reduce the number of tourists and meet the ⅓ visitor to resident ratio outlined in the Maui Island Plan. It also became clear that Councilmember Paltin had desired for the PSLU Committee to discuss the Rawlins-Fernandez proposals as well as her own, even though it had not been properly agendized. Regardless, the PSLU Committee did not end up discussing either legislative proposal. Instead, after several hours of public testimony (mostly in opposition to the proposals), Committee Chair Paltin announced that she wanted to defer the item to a later date, and the members agreed unanimously. Currently, we anticipate the TVR phase-out issue to be agendized again in early February, but it could be sooner.

Moving forward, we are under the impression that Councilmember Paltin intends to let the Rawlins-Fernandez proposal have priority. Therefore, we are refocusing our advocacy efforts primarily against that proposal. Broadly, the arguments against the Rawlins-Fernandez proposal are essentially the same as the arguments against the previous legislative proposal:

1. This Bill Will Defund Affordable Housing for Maui County:

  • Maui County's recent Comprehensive Affordable Housing Plan prepared by Hawaiian Community Assets calls for the County to "increase funding into the Affordable Housing Fund to $58 million annually."
  • If the Rawlins-Fernandez proposal is passed, we estimate thatthe County stands to lose as much as $30 million in property tax revenue annually (which is more revenue than the entire Hotel/Resort Class is expected to generate).
  • This loss in revenue would make it difficult for the County to maintain the services it currently provides, and it would make it impossible to increase funding to the Affordable Housing Fund.
  • Without the revenue, there is no investment in Affordable Housing, and there will be property tax increases for everyone else.

2. This Bill Will Harm the County, the State, and Many Others:

  • The STR property tax class in Maui County is expected to produce $137,908,224 in property tax revenue for the County in FY 2022 (more than 5 times as much as the Hotel class or the Owner-Occupied class).
  • With there being roughly 13,466 properties in the STR class overall, the average amount of tax paid by each property is $10,241 per property.
  • This legislation is designed to remove just over 3,000 properties from the STR property tax class, which equates to roughly $30 million in lost revenue! That is equal to roughly 8% of Maui County’s estimated property tax revenue for 2022.
  • The only way to make up for this huge loss in revenue is to increase property taxes for everyone else..
  • This bill will also remove 3,000+ units from paying both State and County TAT.
  • Conveyance Tax losses could be substantial, but are difficult to estimate at this time.

3. This Bill is Yet Another Gift to the Hotel Industry!:

  • For the same reasons as stated above

The Impacted Properties are Not Good for Our Residents

  • The proposed legislation aims to "create long-term housing opportunities for residents," but the reality is that these properties are not ideal for that.
  • Parking is generally 1-2 spaces per unity, and the spaces are primarily for compact vehicles.
  • Most units were designed as transient accommodations to begin with, and have minimal storage for families or long term occupancy.
  • Units are all 30+ years old, and have high maintenance fees and high special assessments to cope with aging infrastructure. Therefore, the cost to a long term renter or owner occupant would be astronomical without the property generating income.

5. This Legislation is not Lawful:

  • As outlined above, the impacted properties have a vested interest and lawfully acknowledged right to conduct transient accommodations.

Though our opposition to these proposals is multifaceted, the issue really comes down to a simple choice:

The County of Maui can either attempt to reduce tourism numbers by punishing TVR owners, or it can fund affordable housing opportunities for its residents.

It cannot do both.

With that in mind, we don’t need to consider whether or not tourist numbers should be reduced, but instead focus exclusively on the economic benefit provided by these properties, and how losing those benefits would negatively impact housing opportunities.

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